Friday, January 12, 2007

I am a 25-year-old with a $25k student loan. I have been given $10k, but I can only use the entire $10k towards one of the following items:

invest it for retirement funds

save/invest it for a future home

save/invest it towards a child's/children's future college education

pay part of student loan debt.

Assuming that the rate of return on the three investments is equal, and that my student loan charges an interest rate equal to this rate of return, which would I pick and why?

Would my answer be any different if the amount was $25k instead of $10k?

My first inclination would be to pay my student loan. I'm always leery of accruing any debt that I can't immediately pay off. When it came to paying for a college degree, my saving grace was that my parents partially financed my education so that my loan wouldn't be quite so astronomical.

To follow this line of reasoning, I'd be even happier if I received $25k to pay my debt in full! Then, my future pay would be socked away for retirement and a future home. I'd save for the kids' college fund too, but not before retirement, since student loans are easier to get and cheaper to pay off than retirement loans! If they existed. So that's what I'd do. Boring but true.